SEOUL (Reuters) – South Korea’s central bank warned on Thursday that the debt repayment burden of vulnerable households could rise sharply with rising interest rates, highlighting the growing negative impact of the debt frenzy in Asia’s fourth largest economy.
South Korea’s household debt-to-disposable income ratio stood at 172.4 percent in the second quarter, up 10.1 percentage points from the previous year, the BOK said in a regular report on the financial stability.
The bank said the increase was a concern as household income for many declines amid social distancing restrictions in place to fight COVID-19.
South Korea has restrictions in place, including limited opening hours for cafes and restaurants and on the number of people allowed at social gatherings, harming people in the hospitality industry.
“Funds focused on the asset market, along with rapid increases in house prices, could bode ill for financial stability when market sentiment of economic entities changes rapidly due to internal or external shocks,” the report.
The Bank of Korea raised its policy rate 25 basis points to 0.75% in August, the first hike in nearly three years and the first major Asian central bank to walk away from the era’s monetary stimulus pandemic.
Koreans are borrowing more than ever, and policymakers are increasingly concerned that debt will become unsustainable as rates rise, hurting people’s purchasing power and long-term growth.
Nonetheless, the report also says that a further 25 basis point rate hike is only expected to have a limited impact on interest repayments on both households and businesses.
Reporting by Cynthia Kim; Editing by Shri Navaratnam